Budget For Innovation (Just Don't Be So Sure You Know What Innovation You Need Yet)

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If you asked Mike Fitzgerald last January whether State Bank and Trust Co. planned to develop an iPad app for commercial customers anytime soon, he would have said "no." Yet the $2.5 billion-asset bank in Macon, Ga., did just that during the past year.

It swung the unexpected expense because of its fluid approach to budgeting for new technology.

Fitzgerald, the chief revenue and deposit officer, says State has a spending plan like most other businesses, but it reassesses the plan as trends unfold or as customer needs change.

"I can't overstate how important flexibility is in the budget," says Fitzgerald.

"We listen to clients and get ahead of what we think is the demand curve in our marketplace by being very flexible in the way we apply those resources during the year."

He cites the iPad app as an example. It's a cash-management solution for commercial customers on the go, and State prioritized it over other plans because the need arose. "We have a commercial client who is far more mobile and far more demanding of multiple points of access to the company than I think we had anticipated," Fitzgerald says.

This approach is radically different than the way most banks have operated in the past, but so much is changing so fast on the technology front that Fitzgerald says a fixed strategy just doesn't work anymore.

"In this industry, we have written business plans forever," he says, "and we've said, 'Gosh darn it, we're going to do those things because we said we're going to do them; we worked really hard on those plans.'"

But now being nimble is far more important.

Paul Wiggins, a solutions specialist at the technology provider Jack Henry & Associates, says he has noticed "a proliferation of innovation budgets" at community banks lately. This money isn't earmarked for specific projects, instead giving banks the option to pursue whatever might pop up after their annual planning is over.

It is an approach that consulting firm McKinsey & Co. is recommending as well. Companies across all industries need to start allowing for critical decisions to be made on the fly, McKinsey advises. Those who do will capture business from the laggards who operate as if the future is still reasonably predictable.

Fitzgerald says collaboration is key for such discretionary budgeting to be a success. People in different departments of a bank have to work together to implement whatever makes the most sense for customers, rather than go to war over the money for new initiatives, as they might have done in the past.

Ultimately there is no other choice, Fitzgerald insists. Customers are demanding the latest technology, regardless of whether they bank with a small institution or a big one.

"To be proactive, not just to be responsive, means that throughout the year you need that strategic collaboration among management that allows you to have the courage to change, and deviate from the business plan, to capitalize on market opportunity," he says.

Expect banks to pull back on energy lending in the near term, as regulators step up their scrutiny of oil loans and bankers approach the business with a "different attitude," says Mariner Kemper, chairman and chief executive at UMB Financial in Kansas City, Mo.

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